Why Interest Rates Are Rising Everywhere—Except Your Savings Account

The US Federal Reserve’s campaign to fight inflation by raising interest rates seems to have reached nearly every corner of the economy except one: Americans’ savings accounts.

Mortgage rates doubled this year to nearly 7%, and it has become more expensive to get a car loan or carry a credit-card balance. Yet the interest on savings accounts barely budged. In March 2020, the average annual yield on a standard savings account was 0.1%, according to Bankrate.com. It fell to a pandemic low of 0.06% after Americans’ personal saving rate peaked, and is now up to a wan 0.14%.

US commercial banks held $16.8 trillion in deposits as of June, according to the Federal Deposit Insurance Corp. Much of that vast sum sits in individual checking and savings accounts, earning little interest and losing significant value to inflation. There are savings accounts that yield as much as 3%, for those willing to shop around.

At a hearing on Capitol Hill last month, Rep. Michael San Nicolas (D., Guam) remarked on depositors’ underwhelming returns to the leaders of the nation’s largest banks. “One of the only silver linings in a rising interest rate environment is that savers are supposed to be rewarded for their savings,” he said. “They’re supposed to see the interest that they earn on their savings accounts go up.”

In response, the bank chiefs said that they expected the interest rates on their customers’ deposits to increase in the future, based on the actions of the Fed and their competitors.

The country’s largest banks can keep payouts on savings accounts low because they seem to have plenty of deposits to cover their lending businesses for now and don’t need to attract more by raising interest rates.

Some other banks are offering some of the most generous yields in years, but those still paying out meagre interest can count on customer inertia: We fail to take advantage of better deals, because switching banks seems like a headache.

Were that dynamic to change—that is, if enough consumers took their money elsewhere in search of higher returns—banks would be compelled to raise interest rates or make fewer loans, said Philipp Schnabl, a professor of finance at New York University’s Stern School of Business.

Some banks, particularly online ones, have inched up yields in response to the Fed’s rate increases. The annual interest on an online savings account at Ally Bank rose from 0.5% in May to a chunkier 2.1% last month. As of Sept. 30, according to Bankrate, the highest-yield nationally available, FDIC-insured account was UFB Direct, which was paying out 3.01%.

Greg McBride, Bankrate’s chief financial analyst, advises shopping around. “If you’re looking in the right place, it is the best you’ve seen since 2009,” he said. “If you’re just standing pat at the same place you’ve always had your savings, it probably doesn’t look a whole lot different than 2021.” (Bankrate earns money when customers open accounts using offers on its website.)

Even high-yield savings accounts are a weak buffer from 8.3% year-over-year inflation, but their annualised returns of 2% or 3% still beat a return of 0.01%. The median balance of a transaction account, which includes checking, savings and other accounts, was $5,300 in 2019, according to the Federal Reserve, the latest data available. Receiving 3% interest on that balance, versus 0.01%, would work out to a difference of about $160 a year—not an enormous amount of money, but also not bad compensation for opening a new account, which can typically take about 15 minutes of work.

People with much larger balances stand to gain more, yet those depositors don’t always bother to move their money. Tony Chan, a financial adviser in Orange, Calif., said he recently met with a new client who had about $1.2 million in an account earning 0.01% a year, or roughly $120. Mr. Chan said the money was previously invested in the stock market, but the client sold his holdings last year out of fear and has been too busy to find a good place to put it.

Mr. Chan recommended the client move most of the money into a higher-yield account and the rest into certificates of deposit. He estimates that these switches would yield at least $36,000 in interest annually.

Depositors’ inertia can be strong, to their detriment. In a study published in 2021, researchers analysed the behaviour of customers at five U.K. banks. The average customer stood to gain £123 a year, or about $190 at the time, from moving their money to a higher-yield account, yet the researchers found that switching is “rare” and that even customers with relatively large balances were no more likely to do so.

In a follow-up survey, 66% of respondents said that switching accounts would be worthwhile for them if they gained at least £100 in annual interest. But in one subset the researchers studied, despite the fact that 26% of customers could have gained at least that much by switching, only 3.5% actually switched.

“The biggest reason consumers don’t seem to reoptimise their finances seems to be a belief that it will be a huge hassle,” said Christopher Palmer, a professor of finance at MIT’s Sloan School of Management and a co-author of the study. The study also found that customers tend to overestimate how much of a hassle it actually is, and underestimate how much their interest rate might increase.

Financial advisers consider it prudent for people to cart their money elsewhere if they can find a better offer. Savers can also consider safe high-yield alternatives to bank accounts, such as government I Bonds.

Mr. Chan advises clients to keep about one month’s worth of expenses in a checking account and to seek out a high-yield savings account for cash that they want access to in the next couple of years but don’t need to draw on imminently.

Auto dealers across many parts of the country say electric vehicles are becoming too hard a sell for buyers worried about the range, reliability and price of these models.

When Paul LaRochelle heard Ford Motor was coming out with an electric pickup truck, the dealer was excited about the prospects for his business.

“We thought we could build a million of them and sell them,” said LaRochelle, a vice president at Sheehy Auto Stores, which sells vehicles from a dozen brands in Virginia, Maryland and Washington, D.C.

The reality has been less positive. On Sheehy’s car lots, LaRochelle says there is a six- to 12-month supply of EVs, compared with a month of gasoline-powered vehicles.

With automakers set to release a barrage of new electric models in the coming years, concerns are mounting among auto retailers about whether the technology will have broader appeal given that many customers are still reluctant to make the switch.

Battery-powered models have been piling up on car lots, dealers say, as EV sales growth has slowed in the U.S. this year. Car companies have been offering a combination of discounts and lower interest-rate deals in an effort to juice demand. But it hasn’t been enough, because buyer reticence extends beyond the price tag, dealers say.

“I’m not hearing the consumer confidence in the technology,” said Mary Rice, dealer principal at Toyota of Greensboro in North Carolina. “People aren’t beating down the door to buy these things, and they all have a different excuse why they aren’t buying one.”

Customers cite concerns about vehicles burning through a battery charge faster in cold weather or not being able to travel as far as they expected on a single charge, dealers say. Potential buyers also worry that chargers aren’t as readily accessible as gas stations or might be broken.

Franchise dealerships fear that the push to roll out new models will inundate them with hard-to-sell vehicles. Research firm S&P Global Mobility said there are 56 EV models for sale in the U.S. this year, and the number is expected to nearly double to 100 next year.

“I start to think, you know maybe we should just all pump the brakes a little bit,” Rice said.

A group of dealers expressed their concerns about the government’s role in pushing electric vehicles in a letter last month to President Biden.

A Toyota Motor spokesman said the majority of dealers have become “increasingly more confident in their ability to sell Toyota EV products.”

At Ford, the company’s electric-vehicle sales are rising, including for its F-150 Lightning pickup, but demand isn’t evenly spread across the country, according to a spokesman.

Dealers say that after selling an EV, they sometimes hear complaints about charging and the vehicles not always meeting their advertised range. In some cases, customers seek to return them to the dealer shortly after buying them.

“We have a steady number of clients that have attempted to or flat out returned their car,” said Sheehy’s LaRochelle.

While EVs remain a small but rapidly expanding part of the new-car market, the pace of growth has slowed this year. Electric-vehicle sales increased 48% in the first 11 months, compared with a 69% jump during the same period in 2022, according to Motor Intelligence. Sales remain concentrated in a few states, with California accounting for the largest chunk, S&P Global Mobility data found.

The cooling growth has raised broader questions in the industry about whether car companies face a temporary hurdle or a longer-term demand challenge. Automakers have invested billions of dollars to bring more EV models to the market, and many analysts and car executives say they remain optimistic that sales will continue to expand.

“Although the rate of growth has slowed recently, EV demand is clearly moving in the right direction,” said General Motors Chief Executive Mary Barra on a recent conference call with analysts. A combination of more affordable model options and better charging infrastructure would help encourage more people to buy electric vehicles, she said.

There are also varying views within the dealer community about how quickly buyers will adopt the technology.In hot spots for electric-vehicle demand, such as Los Angeles, dealers say their battery-powered models are some of their top sellers. Those popular EV markets also tend to have more mature public charging networks.

Selling an electric car or truck outside of those demand centres is proving more difficult.

Longtime EV owner Carmella Roehrig thought she was ready to go full-electric and sold her backup gasoline vehicle. But after the 62-year-old North Carolina resident found herself stranded last year in a rural area of South Carolina, she changed her mind. Roehrig’s Tesla Model S got a flat tire, but none of the stores in the area carried tires for a Tesla. She ended up paying a worker at a nearby shop to drive her home.

Roehrig still has her Tesla but bought a pickup truck for long road trips.

Tesla didn’t respond to a request for comment.

“I have these conversations with people who say we’ll all be in EVs in 15 years. I say: ‘I’m not so sure. I’ve tried to do it,’” Roehrig said. “I think you need a gas backup.”

Customers who want to ditch their gas vehicle for environmental reasons are sometimes hesitant, said Mickey Anderson, president of Baxter Auto Group, which owns dealerships in Kansas, Nebraska and Colorado.

“We’re in the Colorado Springs market. If this is your sole mode of transportation, and you’re in a market in extremes of elevation and temperature, the actual range is very limited,” Anderson said. “It makes it extremely impractical.”

Dealers representing around 4,000 stores across the U.S. signed the letter in November addressed to Biden, saying the administration’s proposed auto-emissions regulations designed to promote electric-vehicle sales are unrealistic. The signatories ranged from stores owned by family businesses to publicly held giants such as AutoNation and Lithia Motors.

“Some customers are in the market for electric vehicles, and we are thrilled to sell them. But the majority of customers are simply not ready to make the change,” the letter said.

Some carmakers are pushing back EV-rollout plans. GM said in mid-October that it would delay the opening of an electric pickup plant by a year to late 2025. In response to weaker-than-expected consumer demand, Ford said in late October that it would defer $12 billion of planned spending on electric-vehicle investment.

Since September, dealers on average took more than two months to sell an EV, compared with 40 days for all vehicles, according to car-shopping website Edmunds.

While discounts have helped boost sales of some electric vehicles, they also have led to repercussions for some current owners because it reduces the value of their vehicles, dealers say.

“Most people don’t have the confidence to buy an EV and know what it will be worth in 10-15 years,” said Rice from the Toyota dealership.

It may take some time for the industry to adjust because it is still in an early stage of switching to electric vehicles, Sheehy’s LaRochelle said.

“We’re asking for this market to grow organically,” he said.

Why Interest Rates Are Rising Everywhere—Except Your Savings Account

Many banks continue to offer meagre yields on savings accounts, but it can pay off to shop around

Concern about electric vehicles’ appeal is mounting as some customers show a reluctance to switch